The Reagan era of the 1980s began the breakdown of the regular budgetary process, with record deficits, the use of accounting gimmicks, continual partisan bickering, and an unwillingness to face the structural problems that produced large deficits. President Reagan’s political success in cutting taxes marked the change from traditional Republican fiscal conservatism to uncritically embracing tax cuts regardless of their fiscal consequences. The tax increases in 1982 and 1983 were, thereafter, forgotten as part of the Reagan legacy. Cutting taxes without “paying for them” with corresponding spending cuts were priorities of the George W. Bush and Trump administrations.
The continuation of large deficits during the Reagan administration led Congress to pass the Balanced Budget and Emergency Deficit Control Act of 1985, known as Gramm-Rudman-Hollings (GRH) in 1985 (revised in 1987). The purpose of GRH was to reduce the deficit by specific percentages each year until the deficit was eliminated. If the deficit targets were not met, discretionary spending was to be cut (sequestered) across the board automatically. The fixed deficit targets were unrealistic and were avoided by various gimmicks, for example, using unrealistic economic assumptions and shifting the accounting of spending from one fiscal year to another. When the state of the economy led to lower levels of revenue and, thus, required unacceptable automatic budget cuts, GRH was abandoned and replaced by the pay-as-you-go (PAYGO) procedures of the Budget Enforcement Act of 1990.38
1990s: Bush 41, Clinton, and Balanced Budgets
Under Presidents Bush (41) and Clinton, OMB’s knowledge of agency programs continued to be crucial at the agency level, and both presidents decreased the number of OMB staff, despite new responsibilities for managerial functions.39
President Bush’s first budget was based on optimistic economic assumptions and resulted in a projected deficit of more than $400 billion, 4 percent of GDP. As the economy slowed down, it became clear in 1990 that unless serious steps were taken the deficit would balloon unacceptably and a GRH sequester of enormous proportions would be required. OMB Director Richard Darman convinced Bush that, for the good of the country, he had to abandon his campaign promise of “no new taxes” and negotiate a deficit reduction package with Democrats in Congress. The agreement included tax increases, cuts in entitlements, and discretionary spending caps that reduced the deficit by about $500 billion over five years.”40
The compromise in the fall of 1990 resulted in the Budget Enforcement Act, which repealed GRH and its sequestrations. The constraints in the act were intended to control spending and tax cuts rather than deficits, which were subject to economic fluctuations and emergencies. Spending caps were set on discretionary spending and PAYGO applied to mandatory spending and tax changes. That is, if new legislation increased spending, it had to be offset by decreases elsewhere or revenue had to be increased. Similarly, any tax cuts had to be offset by decreased spending or other revenue increases. The PAYGO requirements lasted until the expiration of the act in 2002. Bush’s courageous deficit reduction package, despite denunciations from Republican conservatives, helped make possible the balanced budgets at the end of the 1990s.
Bill Clinton was elected in 1992 after campaigning for increased social spending, but after he was inaugurated, the deficit hawks among his economic advisors convinced him that a continuation of large deficits would hurt the economy and jeopardize the rest of his presidency. They convinced him to recommend tax increases and spending cuts amounting to about $500 billion over several years. Clinton’s proposal, the Omnibus Budget and Reconciliation Act (OBRA) of 1993, was passed with no Republican votes and one-vote margins in the House (218 to 216), with Vice President Gore breaking a tie in the Senate.41
When Republicans took over Congress in 1995, they resolved to force the large cuts in entitlements and program eliminations they had promised in the “Contract for America.”42 They had decided to spare cuts to Social Security and defense spending, and called for large cuts in Medicare and Medicaid. In October, they passed the largest reconciliation bill passed to that time, including large cuts in health care and welfare programs, and the elimination of many agencies, including several cabinet departments. They also threatened to default on the national debt if Clinton did not go along with their cuts and sign the omnibus reconciliation bill.
Nevertheless, Clinton vetoed a continuing resolution, triggering a six-day shutdown of most of the government, involving 800,000 federal workers. A new continuing resolution was passed, and several appropriations bills were passed and signed. But the continuing resolution ran out on December 15, and 280,000 government workers were furloughed. Finally, presidential candidate Robert Dole announced to Republicans in Congress that “enough is enough” and Congress passed a continuing resolution on January 6 to end a twenty-one-day shutdown. Clinton and the Republicans finally came to agree on a budget that was calculated to eliminate the deficit within seven years. The booming economy of the 1990s and the deficit reduction packages of 1990 and 1993 led to balanced budgets from 1998 to 2001, the longest string of balanced budgets since the 1920s (table 2-2).
Both Bush and Clinton were hurt politically by their deficit reducing measures, but they were acts of political courage that enabled the government to produce balanced budgets at the turn of the century. Ironically, one of the issues in the presidential campaign of 2000 was about how to deal with the budget surpluses.
Bush 43, Obama, and the Great Recession
In what Irene Rubin termed “The Great Unraveling,” policy choices in the early twenty-first century turned the four years of surplus from 1998 to 2001 into a pattern of deficit spending, which was greatly exacerbated by the Great Recession of 2008–2010.43
TABLE 2-2. Four Years of Budget Surplus
Budget Surplus and National Debt as % of GDP
| Year | Surplus as % GDP | Debt as % GDP |
|---|---|---|
| 1998 | 0.8 | 41.6 |
| 1999 | 1.3 | 38.2 |
| 2000 | 2.3 | 33.6 |
| 2001 | 1.2 | 31.4 |
Source: Congressional Budget Office, The Budget and Economic Outlook: 2018–2028 (April 2018), Appendix E-1, p. 145.
Despite winning the 2000 elections with fewer votes than Al Gore, President Bush claimed a mandate and won large tax cuts in 2001 and 2003. When some pointed out the increasing deficits and their danger in 2003, Vice President Cheney asserted that “Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.”44 The reconciliation process, which was originally intended to enforce reductions in spending (and thus the deficit) was used by the Bush administration to force through its tax cuts, thus increasing the deficit.45 In addition, the new Medicare Part D prescription drug benefits program and the wars in Afghanistan and Iraq added to the increasing deficits. The discipline provided by the 1990 Budget Enforcement Act (BEA), with its PAYGO provisions, lapsed after 2002 (table 2-3).
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